Abstract
This paper makes an important contribution to the literature on SMEs, namely investigating whether the relationships between determinants and investment are dependent on the level of investment. Based on a sample of Portuguese SMEs, using two-step estimation method, firstly using probit regression and secondly using quantile regressions, we find significant non-linearities in relationships formed between determinants and investment over the distribution of investment. In particular, we find that: 1) sales, age and growth opportunities are restrictive determinants of investment for low levels of investment, but positive determinants of investment for high levels of investment; 2) debt and the interest rate are restrictive determinants of investment but only for low and intermediate levels of investment; 3) cash flow is a positive determinant of investment, but is more important for investment regarding low levels of investment; 4) GNP is a positive determinant of investment, but only for high levels of investment; and 5) investment in the previous period is a positive determinant of investment in the present period, but only for intermediate and high levels of investment. The relevance of the various theories explaining firm investment depends on SMEs’ level of investment.
Highlights
Various theories have tried to explain firm investment
Based on a sample of 1845 SMEs, and using the two-step method proposed by Heckman (1979) in estimation, we investigate whether the relationships between determinants and investment are of the same nature over the distribution of SME investment
Cash flow is a determinant promoting investment over all the distribuion of SME investment. This result contradicts the assumptions of Neoclassical Theory, corroborating those of Free Cash Flow Theory, since SME investment is dependent on exogenous determinants, firms’ endogenous determinants being very relevant in explaining SME investment
Summary
Various theories have tried to explain firm investment. Neoclassical Theory, Free Cash Flow Theory and Agency Theory are important in this context.According to Neoclassical Theory (Hall, Jorgenson 1967; Jorgenson 1971; Chirinko 1993) investment is explained by firms’ exogenous variables, sales being Journal of Business Economics and Management, 2012, 13(5): 866–894 important in this context. Various theories have tried to explain firm investment. According to Neoclassical Theory (Hall, Jorgenson 1967; Jorgenson 1971; Chirinko 1993) investment is explained by firms’ exogenous variables, sales being . Journal of Business Economics and Management, 2012, 13(5): 866–894 important in this context. Based on the information asymmetry in relationships formed between owners/managers and creditors, the studies by Fazzari et al (1988) and Fazzari and Petersen (1993) originated Free Cash Flow Theory. According to Free Cash Flow Theory, unlike what is proposed by Neoclassical Theory, investment depends on firms’ endogenous factors, cash flow being important in explaining firm investment. The high sensitivity of investment to variations in cash flow indicates the severe constraints felt by firms in financing their investment
Sign-in/Register to view highlights & summary Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
